Wharton’s Jeremy Siegel on Fed rate hike ahead of Jackson Hole

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Wharton business school professor Jeremy Siegel said Friday that the US Federal Reserve need not raise more than 100 basis points because an economic slowdown is in sight.

“I think we only need 100 basis points more,” Siegel said on CNBC’s “Squawk Box Asia.” “The market thinks it will be a little more – 125, 130 basis points more. I feel like we won’t need that much because of what I see as a slowdown.”

“If you want to do it all at once, or you want to do it over a period of two to three meetings, it doesn’t matter much,” he said. “The question is what final rate we should go to.”

The Fed raised its benchmark rate by 0.75 percentage points in both June and July — the largest consecutive rises since the central bank began using the fund rate as its primary monetary policy tool in the early 1990s.

Traders are betting that the Fed will raise rates again at its next meeting in September and then again in November and December before cutting rates in the spring, subject to evolving economic conditions.

I hope [Powell] recognizes that the degree of tightening we have implemented, and are expected to introduce between now and the end of the year – at least 100 basis points – is severely slowing the economy.

Jeremy Siegel

Wharton business school professor

Siegel added that housing costs, which are a major driver of core inflation, “have fallen by a record amount exceeding a six-month period” of late.

“The real situation in the United States is that real estate prices are actually starting to fall,” Siegel said.

What should you pay attention to?

Siegel said investors would like to hear more details about what the Fed plans to do about inflation during Fed Chair Jerome Powell’s Jackson Hole speech later Friday.

Powell is scheduled to speak at the annual symposium, where he is likely to emphasize that the central bank will use all the firepower it needs, in the form of rate hikes, to stamp out inflation. Observers say he will also likely point out that after the Fed finishes raising rates, it will likely keep them there, contrary to market expectations that it will actually start cutting rates next year.

Siegel said markets would prefer Powell signals that the Fed would be eyeing upcoming consumer price index data, rather than “backward-looking data.”

“I don’t want Powell to be overly aggressive just by looking at the visual consumer price index statistics,” Siegel said. “If we look at the difference between inflation-protected bonds and nominal bonds, they have fallen from their highest point,” he said, adding that inflationary pressures appear to have stabilized.

Inflation-linked bonds have become extremely popular this year as investors look for yield to counter rising prices.

“I hope [Powell] recognizes that the amount of tightening we have implemented and are expected to implement between now and the end of the year — at least 100 basis points — is really slowing the economy,” Siegel added.

We’ve added 3.2 million employees, but we’ve had a declining GDP like we’ve never seen before. This is a productivity collapse of unprecedented proportions, and it is very significant.”

Jeremy Siegel

Wharton business school professor

Fed officials were “non-committal” about the magnitude of the rate hikes ahead of the upcoming Federal Open Market Committee meeting — scheduled for Sept. 20-21 — according to a Reuters report. A poll predicted a 50 basis point increase during the meeting.

Siegel said US money growth is evidence of an economic slump, describing it as “one of the sharpest slowdowns in history.”

Other key data, such as August’s nonfarm payrolls to be released next week, is something Siegel said he will be keeping a close eye on. The latest data showed that the workforce rose sharply in July, surpassing estimates and defying recession fears.

‘Productivity Collapses’

Siegel added that he is “concerned” that there isn’t much discussion about what he called a “productivity collapse,” calling it the biggest puzzle the Fed has to solve in upcoming meetings.

“We’ve added 3.2 million workers, but we’ve had a declining GDP like we’ve never seen before,” he said. “This is a productivity collapse of unprecedented proportions, and it’s very important.”

‘What are they doing? How many hours?’ he said. “Are we misreporting? Do people who work from home actually work from home?”

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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